This is an article from the August edition of EMC's European Mobile Communications Report. This report is published monthly detailing current and past subscriber growth, licence awards, infrastructure contracts and market analysis from cellular activity in Eastern and Western Europe. For further information on this report, please see: http://www.emc-database.com/europeanreport/?src=JCemcdz+ST=OEM
Virgin Mobile completed the floatation of 25% of its ordinary shares at the end of July 2004. Overall, however, the float marked a poor debut for the company: as financial analysts had anticipated its chances of success were comparatively limited from the outset for several reasons, some related to the state of the UK mobile market as a whole, and others to the outlook for the company itself.
After having initially indicated that it would offer 98 million shares in the price range of 235p to 285p per share, the company reduced the offering price to 200p per share. As a result the company was supposed to have a market capitalisation of GBP 500 million. In the event, however, even the discounted price was not considered a particular bargain.
The UK mobile sector as a whole has not been a particularly attractive investment prospect for the best part of four years, with investors experiencing only minor gains or losses. Furthermore, competition in the UK market is steadily, albeit not frantically, increasing. Consequently, according to Lehman Brothers the UK mobile market is Europe's most at risk from a significant deterioration and margins are expected to narrow.
From an investment perspective, Virgin Mobile's profile, which initially may have seemed rather attractive, proves to be less appealing when its operational indicators are recalculated according to mobile industry standards that have only recently been adopted by the company in preparation for its flotation on the stock exchange. For instance, it has now been obliged to admit that it has only 3.3 million active subscribers, compared to the almost four million subscribers that it used to report before conforming to the UK mobile industry reporting standard. (Virgin now considers as active only those subscribers that have produced revenue in the previous 90 days).
Virgin Mobile: active vs total subscriber levels
Source: Virgin Mobile (figures in 000's)
True, Virgin Mobile is still able to attract new customers with easy-to-understand tariffs and its simple, direct communication style; its brand is widely recognised and has a reasonable reputation for quality and customer satisfaction; but Virgin Mobile still appeals to consumers mainly for its good value (cheap) SMS and call rates. With an estimated quarter of its market share accounted for by the 15-34 year-old market segment, further growth seems likely only to be fuelled by acquisitions of low-end subscribers.
Of the 606,000 subscriber net additions in the six months to June 2004, figures from the company show that only 289,000 were active subscriber net additions. Moreover, strong growth of the subscriber base has been accompanied by a rapid decline in customer activity. As a result, gains in terms of numbers of subscribers have been partially offset by the rising inactivity level of subscribers, with the gap between active and inactive subscribers widening. In June 2004 the activity level deteriorated to 79.8% of the total base, down nearly 5% in only six months.
Total subscribers | 31 Dec 01 | 31 Dec 02 | 31 Dec 03 | 31 Mar 04 | 31 Jun 04 |
| Subscribers (000's) | 1,445 | 2,383 | 3,678 | 3,961 | 4,284 |
| Active subscribers (000's) | 1,224 | 1,990 | 3,101 | 3,240 | 3,390 |
| Active subscriber additions (000's) | - | 766 | 1,111 | 139 | 150 |
| Activity level | 84.7% | 83.5% | 84.3% | 81.8% | 79.8% |
| Source: Virgin Mobile |
The explanation for the decline in the level of subscriber activity could lie in the quality of the subscribers. As is generally recognised by the market, Virgin Mobile has always targeted price-sensitive customers (in particular the youth and student market segments) through the promotion of low call rates and low-priced SMS and SIM cards (notably, a long-running campaign promoting SMS at the price of GBP 0.03 per message). The customers attracted by these deals are opportunistic and tend to remain with the provider only until a better offer (in terms of price) arises. Thus, offers are embraced and exploited by subscribers who then churn off the network at the end of the promotional period.
The picture is confirmed by the company's reported KPIs. Despite the absence of a full public record of performance indicators from Virgin Mobile, it is possible to observe that two of the key indicators have worsened slightly: annual ARPU, already one of the lowest in the UK market, dropped from GBP 147 to GBP 142 over the past months. Meanwhile, Virgin Mobile's churn rate was on the rise, from 13.8% of the end of 2003 to 15.2% at the end of June 2004.
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